The seriousness of the high street downturn was laid bare on Thursday as boss Sir Philip Green reported a near 40% drop in profits at his Topshop-to-BHS fashion empire and warned of plans to shed 250 UK stores.

Profits before exceptionals at Arcadia tumbled from £213.2m to £133.1m in the year to 27 August, a decline of nearly 38%, with Green cautioning that the mild weather had bought no respite in the new financial year.

"The warmest October and November on record have made autumn trading much tougher," he said. "Winter goods are tough."

Green predicted store groups would have to step up discounting before Christmas to shift the unsold winter coats and boots that are usually their biggest money spinners. BHS and rivals such as Debenhams and Marks & Spencer have already been heavily discounting winter clothing over the past couple of weeks, offering savings of up to 40%, and Green said there would be no let up: "How can it and why should it? Everybody's trying to get out their winter goods," he said.

Arcadia, which also owns the Topman, Burton, Dorothy Perkins, Miss Selfridge, Wallis and Evans brands, had encountered "very challenging conditions both in the UK and around the world" during the year, with like-for-like sales finishing down 1.8%. That figure has worsened to 4.4% in the first 12 weeks of the new financial year.

Green said its profit margins had come under pressure because, unlike high street rivals such as M&S and Next, it had not increased its clothing prices to reflect the jump in raw material costs. The decision to absorb the additional costs had resulted in a £53m hit, said Green. The holding company, Taveta Investments, moved into the red after booking £253m in exceptional charges, resulting in a £120m pre-tax loss for the year.

"The results from Arcadia underline the pressure on all parts of the clothing market," said Conlumino analyst Neil Saunders. "Even stronger retailers like Topshop are faced with rising supply costs at a time when shoppers are demanding lower prices. The upshot is that to maintain sales momentum it is increasingly necessary to accept a hit on margins and profits. Unfortunately, consumer confidence is such that what's lost on margin cannot be easily be regained by higher volume sales."

Green, who has amassed a personal fortune of £4.2bn, said consumers were in a sombre frame of mind: "I do believe everybody today is more financially aware than they've ever been in their life. I don't see it getting any worse but I think where we are is people are much more constrained on a general basis by necessity."

The 59-year-old entrepreneur has merged BHS, which he bought for £200m in 2000, with Arcadia, which he acquired for £850m two years later. He did not separate out BHS's performance but the retailer is thought to have struggled as its older shoppers have been in the front line of the squeeze on incomes.

Arcadia, with annual sales of £2.7bn, is one of the UK's largest privately owned retailers with more than 44,000 employees and 2,507 stores. The entrepreneur said he had invested £113m in the group during the year taking Topshop to the US, where it now has stores in New York and Chicago, with a Las Vegas store set to open in March. The businessman said, however, that it would look to shed 250 stores in the UK when their leases came up for renewal over the next three years, reflecting changes in shopping habits as more goods were bought online.

Arcadia's internet sales were up 27% for the year.

"In this year in net terms we have closed about 60 stores," Green said. "We have got, from my memory, 450-460 stores where leases expire in the next three years, and I think in our latest summary we will close more than half of those. So I would say I'd expect to close 250-260."

Saunders said the one part of the clothing market that continued to grow rapidly was online: "This disparity between store and online growth justifies Sir Philip's decision to reduce store numbers and consolidate his high street presence. Longer term, we believe that such a rebalancing will help to boost profitability."